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House View Q3 2016

The Aviva Investors House View document is a comprehensive compilation of views and analysis from the major investment teams.

The document is produced quarterly by Aviva Investors investment professionals and is overseen by the Investment Strategy team. The House View document serves two main purposes. First its preparation provides a comprehensive and forward-looking framework for discussion among the investment teams. Second, it allows us to share our thinking and explain the reasons for our economic views and investment decisions to those whom they affect.

Global Economic Outlook

Global growth expectations modestly lower

Inflation set to rise steadily in H2 from historically low levels

Brexit worries argue for loose or looser monetary policy

Markets rebounded in Q2 after Q1 jitters and macro releases generally pointed to ongoing, if slow, recovery and a base for headline inflation. Although that remains largely true still, the Brexit decision has muddied the waters considerably. The direct macro-economic consequences of the UK vote to leave the EU should be relatively contained – except for the UK itself where they are expected to be adverse and significant. But the consequences will be considerably worse if there is political contagion. The scaling back of anticipated hikes in the US, alongside some signs of relative stability in China has helped sentiment. Easier policy across the world will support growth and even those countries that have suffered most in recent times – Brazil, Russia – have some reason to think that the worst may be over. Overall, global growth expectations have been scaled back modestly again, but we hope that this may be the end of a long sequence of downgrades.

Global inflation remains low, but is expected to rise slowly and steadily from here, helped by the rebound in the oil price and significant base effects. To the extent that the concept has any validity, the global output gap is probably still negative, meaning only limited (potentially inflationary) pressures on supply capacity. Those buffers may be closer in the US where core inflation measures are more or less at pre-crisis averages already and where there are some clear indications of gently rising inflation pressures. Elsewhere, inflation is generally below target and set to remain there. Worryingly, Japan is seeing falling prices again which should lead to additional policy action. Overall, Central Banks are likely to delay hiking (US) or provide additional/extended stimulus (Japan, UK, euro zone).

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